Aflac's CEO Talks the Economy, Investments, and Health-Care Changes

Why the man behind the duck thinks his supplemental insurance business is in good shape.

The boisterous Aflac(NYSE: AFL) duck with a penchant for shouting is charming, in his own way, but the CEO of the supplemental health and life insurance company is a better conversationalist.

Aflac CEO Dan Amos stopped by Motley Fool headquarters recently to chat about the famous duck, the company, and how the markets and the economy are affecting Aflac's business. Here are three quick hits from Amos' visit.

On the economy's effect on Aflac's businessAmos said the downturn in the economy has hurt Aflac's business to a degree, because the company predominantly writes plans for small businesses, which continue to suffer in the aftermath of the recession. Construction and hospitals in particular are large areas of business for Aflac.

"From that standpoint, it affected us negatively because there were layoffs," said Amos. "If they're laid off, of course they can take the policy with them. But at the same time, there are no new hires, and that had an impact on us."

From a profitability standpoint, Aflac's products are indemnity in nature and their loss ratios are very predictable. However, as inflation occurs, periodically Aflac has to offer upgrades of policies. "[B]ut we've never had to have rate increases as a general rule on our business," said Amos. "If we do, it's done by class of the state, not by individual. So, that has protected us, as well."

On the company's investments and exposure to EuropeAflac's bottom line is highly correlated with the returns it gets from investing the proceeds from its insurance business. Market volatility makes deciding where to invest a challenge.

As a general rule, Amos said, the company tries not to invest more than $250 million in any one company or country -- taking currency fluctuations into account. He said Aflac's largest investment is in Japanese government bonds. The company invests roughly $20 million per day in Japan within its overall portfolio. (One out of every four households in Japan has an Aflac policy and 80% of Aflac's earnings and invested income stems from Japan.)

However, Japan doesn't really have a market for long-dated maturities. "You can find them, but 20-year dated maturities are almost impossible to find," said Amos. "So to match assets against liabilities, we ultimately had to go other places."

As such, Amos said, the company does have exposure to Europe via companies and country bonds, including the PIIGS countries: Portugal, Italy, Ireland, Greece, and Spain. Aflac owns shares in the top three banks in England, including Barclays(NYSE: BCS); the top three banks in Germany, including Deutsche Bank(NYSE: DB); and banks in other countries such as Spain. (You can view a list of Aflac's European exposure here.)

"So, we've spread our risk," said Amos. "[But] it puts us in the light a lot of times because if someone says, 'Do you own Greece?' Yes, we own Greece. It's part of the European common market. We thought that would be safe. So that's what we've done."

But Amos said his main focus is whether a business's or country's bonds will continue to pay. "There can't be what I call a 'run on the bank' in our business," he said. "There are no cash values. So as long as those bonds are going to pay, then ultimately we're in a very good position. And we can have the financial solvency to take hits if we need to because we made over $2 billion in profits this year."

On the health-care lawUnlike health-care insurers like UnitedHealth(NYSE: UNH) or Aetna(NYSE: AET), Amos said he doesn't think the new health-care law will have a major impact on Aflac, because Aflac has had practice and, importantly, success with selling in a national health-care environment in Japan.

"In the United States, we want people to have major medical," said Amos. "We were never in the fight of 'should you have national health care or not'. Our position was you need to have major medical first, or national health care. I think we'll do very well."

The law doesn't directly affect Aflac's type of policies, in that it was designed to offer coverage for people who do not already have health insurance, not to enable people to obtain a better policy. "So we don't look for a broad class of people that have our policies now to all of a sudden have something new from national health care that's going to be much better than what they had before, and therefore they won't need ours," said Amos. "So I think we're well positioned."